In the current economic climate, administration is becoming an increasingly used route for struggling businesses to go down. Last year alone more than 4,500 companies went into administration, with over 2,000 of these in the final quarter. Many businesses are turning to pre-pack administrations to help them deal with this most difficult of situations.

What is pre-pack Administration?
Pre-pack administrations allow a business to be sold without creditor's approval, thereby protecting the business from creditor attack in the process. Prior to the administration, discussions are held between directors and insolvency practitioners (IPs) to agree a deal to allow a sale of the business, normally to be exchanged and completed immediately after the IP's appointment, either using the out of court procedure or if necessary an application to the Court. Recent high profile examples of Pre-Pack administration include Whittards of Chelsea, the clothing chain USC and the UK's biggest snooker hall operator Rileys. All are still trading.

What about the creditors?
In many cases the owners of the existing business form a new company, which then buys the assets of the old company from the appointed administrator and leaves behind the debt. As creditors are not privy to this process, they could be forgiven for thinking they have been left in the
Pre-pack administrations allow a business to be sold without creditor's approval, thereby protecting the business from creditor attack
lurch with unpaid bills; however the process is a valuable legal mechanism, which in most cases provides the benefit of maintaining jobs and an on-going viable business. It must be remembered that the business placed in Administration was after all insolvent in any event. Administrators are also appointed by the Court.

The rules
It should also be noted that under The Statement of Insolvency Practice (SIP) 16 (introduced on the 1st January 2009) IPs are under a strict duty to try to secure the best outcome for creditors as a whole, which in most circumstances is why they can justify a pre-pack sale to those who previously owned and ran the business. Information which must be provided to the creditors includes-:
  • Why the pre-pack sale, as opposed to any other alternatives was the best option for the creditors;
  • What efforts were made to notify with the major creditors
  • Why the business could not trade and be offered for sale during the administration period;
  • Identity of the purchaser and relationship (if any) with the directors, shareholders of secured creditors;
  • Formal valuation of assets
Using the above guidelines and rules, the use of pre-pack Administrations will continue to flourish as the best possible means to rescue a business. Colman Coyle has a specialist Insolvency, Business Recovery and Restructuring department who can represent you throughout the process.

For further advice on how to begin the pre-pack process or on any other recovery or insolvency issue email georgina.kyriacou@colmancoyle.com